Should Investors Buy Pepsico Stock Instead of Coca-Cola Stock? | PEP Stock vs. KO Stock

SUMMARY

Parkev Tatevosian, CFA, compares PepsiCo and Coca-Cola, analyzing their financial performance, market positioning, and valuation to determine which offers a better investment opportunity. The analysis highlights differences in business segments, profitability, and current market valuations, concluding with a preference for PepsiCo due to its significant discount.

MAIN POINTS

• Coca-Cola is trading near its 52-week high while PepsiCo is near its 52-week low, prompting a comparison of their investment potential. [0:00]
• PepsiCo is a much larger company due to its snacks division, while Coca-Cola dominates away-from-home beverage channels through exclusive partnerships. [1:00]
• Coca-Cola has seen improved revenue post-economic reopening and maintains a significantly higher and improving operating profit margin compared to PepsiCo. [2:00]
• Return on invested capital is higher and improving for Coca-Cola, while PepsiCo's has remained relatively flat over the past decade. [3:00]
• Coca-Cola trades at a historically high valuation premium to PepsiCo, with market multiples diverging more than ever before. [4:01]
• Despite Coca-Cola's stronger performance, PepsiCo is favored as the better buy due to its substantial discount and undervaluation relative to fair value. [7:00]

DETAILED ANALYSIS

PepsiCo and Coca-Cola, two of the world's leading beverage companies, are currently experiencing divergent market trends, with Coca-Cola trading near its 52-week high and PepsiCo near its 52-week low. PepsiCo's larger size is attributed to its extensive snacks division, which includes brands like Doritos and Cheetos, generating substantial revenue beyond beverages. In contrast, Coca-Cola focuses solely on beverages but holds a dominant position in away-from-home channels such as restaurants, theme parks, and entertainment venues, secured through long-standing exclusive partnerships with major brands like McDonald's and Disney.

This strategic advantage has enabled Coca-Cola to benefit significantly from the post-pandemic economic reopening, as consumer activity outside the home rebounded.

Financially, Coca-Cola outperforms PepsiCo in profitability, boasting an operating profit margin of 31.83% over the trailing twelve months—more than double PepsiCo’s 15.5%. This margin has improved markedly since 2017, while PepsiCo's has remained relatively flat and volatile. When assessing return on invested capital (ROIC), Coca-Cola again leads at 17.3%, compared to PepsiCo’s 14.5%.

Both companies maintain ROICs well above their weighted average cost of capital (WACC), which stands at 6.7% for Coca-Cola and 6.6% for PepsiCo, indicating strong value creation for shareholders.

Valuation metrics reveal a stark contrast: Coca-Cola trades at a forward price-to-earnings (P/E) ratio of 23.6, near its historical peak, while PepsiCo trades at a forward P/E of 15, its lowest in recent years. This divergence is unusual, as the two companies typically trade at similar multiples. Despite Coca-Cola’s superior performance and stability, PepsiCo’s current market price of $135 per share is significantly below its calculated fair value of $219, presenting a compelling opportunity for value investors.

Ultimately, while both companies are rated as buys for long-term, dividend-focused investors, the substantial discount on PepsiCo shares leads to a preference for PepsiCo as the better investment at current prices.

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